Michael Taylor

Senior Analyst, Renewable Cost Status and Outlook at IRENA

Q. I’m sure that you have seen in the news that the lowest bid for the 200 MW CSP plant in Dubai came at 9.45 US cents per kWh. Is this something you could have foreseen six months ago?

MT. Yes, last year IRENA released the report “The Power to Change: Solar and Wind Cost Reduction Potential to 2025” that analyzed the cost reduction pathways for solar PV, CSP, offshore and onshore wind. Because CSP is in its infancy in terms of deployment, there is a great opportunity for cost reductions, not only from technology improvements but also from greater competition in the supply chain and economies of scale. We crunched the numbers and came up with an LCOE of around 9 US$ cents per kWh by 2025 for solar tower. That number is based on a Weighted Average Cost of Capital (WACC) of 7.5%. Based on previous experience with Dubai Electricity and Water Authority (DEWA), we often see the projects with a lower WACC in Dubai.

The recent bid at 9.45 US$ cents per kWh confirms that CSP is on track to achieve the cost reductions that we anticipated by 2025. Of course, there will be a range around that central estimate but it’s reassuring to know that we already see some projects coming through, notably this DEWA one, that are delivering on the potential.

Q. Do you believe this bid could be even lower in a place with better solar resources than the UAE?

MT. Yes, we already have evidence of that. In recent auctions in Chile, a country with some of the the highest solar resources in the world, there was a CSP bid at $63 per MWh. The bid wasn’t successful, but I understand that the project developer will look to rebid that project, and when you’re looking at providing firm capacity, that is, providing power over 24 hours, CSP could be a good option in Chile.

The bid might not be exactly the same, but it shows what you can achieve with better solar resource. Also, in Chile the air clarity is better than in the UAE, which could contribute to a lower bid for towers as the light at the receiver is not as diffuse.

Q. What would you say are the main drivers for cost reductions in CSP?

MT. This depends on whether you are talking about parabolic trough or tower. The analysis we did shows there are opportunities for cost reductions across the spectrum. We are anticipating total installed costs to fall in the range of 33% to 37% by 2025. The reduction in levelized cost of energy is expected to be slightly higher, in the range of 37% to 43% by 2025.

This cost reduction will come as a combination of reducing installed costs and improving performance, notably higher operating temperatures, which helps increase yield and reduce the installed costs of thermal storage. There are also gains to be made from unlocking efficiencies in operations and maintenance (O&M). If we do all of that, we will see significant cost reductions.

Roughly two thirds of expected reductions in the cost of energy come from the total installed costs (see Figure 2 for main cost components). And within that the solar field, and Engineering, Procurement and Construction (EPC) costs have the most weight, as do reductions on thermal storage systems (TES) costs when you are improving efficiencies by moving to higher operating temperatures. We really need to look across the board to unlock these cost reductions.

Figure 2: Total installed cost categories and their major categories for parabolic trough and solar tower (Source: IRENA/DLR 2016)

Q. Would cost reductions come more from equipment costs or installation costs?

MT. It’s a combination of both. In parabolic trough, there are opportunities to use larger aperture troughs to increase economies of scale whilst installing fewer troughs for the same output. This should result in reduced installed costs, even though the larger troughs would require additional structural strengthening.

A lot of cost reductions will result from optimizing designs. In some cases, we might see a slight increase in specific installed costs, which is fine as long as it improves efficiency and reduces the overall cost of energy. There is still a significant opportunity to continue to optimize design to improve performance.

Q. What do you see as the biggest opportunity to improve performance and reduce costs?

MT. Once again, the biggest opportunities for cost reduction are represented by major cost items like the solar field and EPC costs. Having said that, you can’t generalize too much across parabolic trough and solar tower.

For parabolic trough, IRENA sees a fairly even distribution of the cost reduction opportunities across the solar field, EPC, owner’s cost, and thermal storage.

One of the avenues to reduce costs for thermal storage systems is operating at higher temperatures. But towers are already operating at a higher temperature than parabolic trough, so there is less room to boost the temperature differential or reduce the physical volume.

The cost reduction opportunities for solar tower technology are much more concentrated on the solar field, particularly the heliostats and tracking costs. EPC cost reductions would concentrate on lowering installation costs. And compared to parabolic trough, there should be relatively more significant cost reductions in the power block.

There is really not one stand-out area that’s going to allow us to make some kind of breakthrough in cost reduction. It really is acting on each of the individual cost component with the long-term goal of reducing overall energy costs, but also by improving performance and reducing O&M costs.

The combined contribution of industrialization and economies of scale, and increased competition within the supply chain, all acting to reduce costs, can’t be underestimated.

What we have seen in wind and PV is that when we reach critical mass, and a plurality of suppliers, you get more effort to reduce margins, finding more options to find alternative materials and innovate. Additionally, contractors are more willing to reduce contingency risks as they gain experience with the technology. They are also prepared to accept a lower rate of return on capital on CSP projects. So, it’s really a combination of these factors.

Q. When do you think that CSP might reach this critical scale?

MT. It’s impossible to guess. If you want to make a very poor analogy, you can look at what happened in offshore wind. For many years in Western Europe, offshore wind was very expensive, in the range of 13 to 20 US cents per kWh. at the end of 2016, offshore wind reached around 13 GW of total installed capacity and we saw very competitive tender results in Denmark, the Netherlands and Germany. And that happened even faster than industry roadmaps. So, CSP is at 5 GW. I’m not saying that if we get can hit 13 GW we will see the same thing with CSP, but clearly if you’re talking about a technology which only has 5 GW globally, you can say that the main method of cost reduction is achieving scale. Once critical mass is reached, costs will come down quicker than people think.

And the benefits of CSP in providing dispatchable generation and the ability to allow higher shares of variable renewables means that CSP is a good part of the toolbox that needs to be there as part of the energy transition. For countries with a high level of direct solar irradiation, CSP might well be an important part of their energy mix.

Q. Interesting, and you mention dispatchability and flexibility as benefits of CSP, which leads me to the topic of measuring value rather than cost. Recently, there has been a lot of talk about moving away from measuring the cost of CSP to measuring value. How can you start to place a value on things like dispatchability?

MT. Different cost metrics provide you with different information. Measuring energy costs is relatively straightforward if you have the all the relevant inputs. But the value of electricity varies every day depending on the nature of demand, load profile and other characteristics of each electricity system.

If you have an energy system which has virtually no variable renewables, such as wind and PV, you can install them without much planning. But eventually, as the share of variable renewables grows, you would need to increase system flexibility to realize their full value to generate power whilst producing very low CO2 emissions. If you have CSP with thermal storage, you can produce clean energy when the system is constrained by high demand and low production of variable renewables. During times like this, typically the afternoon or early evening peak, generation costs are also high.

“The exciting thing is that CSP provides dispatchable, CO2 free generation that allows us to balance the grid; providing the flexibility we need to have a higher share of variable renewables and enable a low-carbon energy system”

CSP can step in and capture this value. Unfortunately, there is no single metric to tell us what the additional value of CSP is, that needs to be evaluated by carrying out market specific simulations to determine where CSP delivers the most value.

The exciting thing is that CSP provides us with dispatchable, CO2 free generation that allows us to balance the grid; providing the flexibility we need to have a higher share of variable renewables and enable a low-carbon energy system.

This is the value of CSP we would like to see realized in the near future. Even now, when energy systems continue being dominated by fossil fuels, the system will be constrained at times of peak demand. In these cases, the ability of CSP with TES to shift generation can deliver significant fuel savings. Finally, CSP with TES can deliver additional value by providing ancillary services such frequency response and reserve capacity.

Q. What role do you see concessional financing playing in making CSP more affordable?

MT. It plays a very important role. When you have a technology like CSP, in the infancy of its deployment, where installed costs are still quite high. If you can’t get the lowest cost of capital possible the costs of electricity are still going to be high.

Current investments in CSP are, in a way, learning investments. Concessional financing supports further deployments, and with every additional CSP plant on the ground, costs are driven down until the technology is competitive.

Having low-cost financing to take on some of the financing risk and lower capital costs allows us to deploy CSP and other technologies at the lowest possible cost until the technology can stand on its own two feet in the market. For this reason, concessional financing is a very important part of ensuring you get the momentum with CSP so the costs come down rapidly.

Q. You mention that CSP is part of the solution to delivering a low carbon energy system. Why should countries in the MENA region care about developing low carbon energy systems? What are the benefits for them?

MT. There are multiple benefits. Using renewables in the electricity system allows countries to meet their economic, environmental, and social development goals. Now there are very competitive options available depending on the country: onshore wind, PV, some hydro potential that hasn’t been tapped, and CSP is emerging as a competitive option too.

For new capacity, renewables typically offer a solution that is the same cost or lower than fossil fuels. Morocco, UAE, and Jordan, among other countries, have installed renewables to reduce the overall costs of their electricity system.

At the same time, renewables help with reducing air pollution, which can be a very significant issue at the local level. But there are significant benefits there that can be unlocked by countries with the worst current air pollution.

“For new capacity, renewables typically offer a solution that is the same cost or lower than fossil fuels. Morocco, UAE, and Jordan, among other countries, have installed renewables to reduce the overall costs of their electricity system”

Renewables also provide social benefits, proportionally speaking they support more jobs than fossil fired electricity production. These jobs are more distributed, because renewable generation is more spread across various regions, or could be distributed in regions which need additional assistance for development.

And there are opportunities for local manufacturing, as there are components in all renewable power generation technologies which can be produced locally. This both benefits the local economy and can often contribute to lower overall costs. If you are a fossil fuel producer, you can displace oil or gas-fired generation and have more resources available for either exports or to prolong the life of your reserves.

The thinking needs to adapt to the fact that we are now in a very competitive situation for renewable power generation options and that it would be a huge missed opportunity not to unlock the economic, social and environmental benefits that renewables bring.